by Elias Makris, Partner
Control is a key factor in business succession. If you do not control your business succession, you will not realise the potential benefits that are available. At the same time, certain pressures will impact on your succession that you cannot control. It is critical that you understand exactly how control affects your succession so that you can put in place effective succession planning that achieves the highest possible value for the business.
It is important to accurately identify the key elements in succession. For those that you can control, you should take steps to ensure that you do so effectively. For those that you cannot control, you should establish strategies to minimise their impact.
Make sure that you fully understand how various succession options impact on your ability to control your business as they may be a key factor in deciding which option is best for you.
You must also be aware that as you progress with your succession, it is inevitable that you will lose control of your business. Where your exit strategy involves a staged exit, this will mean that you have to work alongside new co-owners – this adjustment can be hardest for sole proprietors who have spent their lives building the business.
What CAN you control?
Effective succession planning empowers you to directly control most variables that will be encountered. Starting to plan for your succession early will enable you to identify most of the variables involved, therefore increasing the probability of controlling them. The effectiveness of this however, will also depend on the succession planning process that is followed. This can be demonstrated by way of an example.
Are you like Business A or Business B?
| Take two identical businesses, A and B: – The business owners are aged 55 and 56 – Both business owners want to retire at aged 59 – Both businesses have annual income of $2.5m and (adjusted) profit of 25% – Both businesses have current valuations of $2.8m (capitalisation rate of 4.5 x adjusted earnings before interest and tax (EBIT))Outcomes for Business A Business A ignores succession planning and at age 59, sells to an external planner for $2.8m (ignoring future growth and inflation etc).Outcomes for Business B Business B investigates and implements an effective succession plan, addressing issues such as historical performance against industry benchmarks, a staff improvement program and tripartite arrangements with alliance partners for growth opportunities. By the time the business owner is 59, Business B has grown its income to $4m and improved the adjusted profit to 30%. At the same capitalisation rate, this business has improved its value to $5.4m. On top of the higher sale price that the owner of Business B can command at exit, there have also been ongoing benefits such as increased annual benefits to the owner and greater levels of staff retention. |
Basically, as the business owner, you are able to control everything internal to your business. To establish the most effective succession plan, you must determine those elements that will have the most impact on the success of your plan.
Typically, these include:
– Profitability of the business
– Quality of staff
– Effectiveness of systems to run the business, reducing reliance on the business owner
– Infrastructure of the business (Management Information Systems, human resource policies, etc)
– Condition of physical assets of the business
– Customer profile
– Quality of selling documentation
If you do not leave yourself sufficient time to get these elements in order prior to your succession, you are not really controlling your succession.
What CAN’T you control?
There are many factors that impact on your succession that you cannot control. Typical examples include general economic conditions, changing regulatory environments, the impact of competition and even the poor health of the business owner (which may impact the timeframe over which the succession needs to be completed).
As mentioned, it is important to be clear on which succession factors you have control over. Consider staffing, for example. We all know that a business is only as good as its key personnel and many owners think they are unable to control the decision of staff to resign. The resignation of key staff in the years preceding an owner’s succession is one of the last things the owner wants, as it can negatively impact on the business in a number of ways.
In fact, there are steps you can take as the business owner that may influence staff decisions to resign. Leading strategies are performance based and can therefore be financed at no net cost to the business. Strategies may even provide the opportunity for staff to self-fund their entry into ownership. This is why a good succession plan should incorporate strategies that will provide significant incentives to retain key staff.
Your next step…
The earlier you start planning for succession, the more time you will have to make your business sale-ready.
The better the succession program that is followed, the greater your control will be over the factors that impact on the outcome of your succession.
If you would like to find out more about how to plan effectively for succession planning, please contact me or your accountant at Rosenfeld Kant today: (02) 9375 1200 or gary@roskant.com.au, raul@roskant.com.au, elias@roskant.com.au